You may notice that after Black Friday, the prices of certain items go high. Sometimes when you are in Walmart, you will find that some products are more expensive than before. But after some time, their prices fall down.
It’s quite normal that prices rise and fall.
Today, when you go to every Starbucks and order a Grande Latte, you pay $3.65. However, do you remember how much was a cup of coffee ten years ago?
The price definitely increases during these years.
We call this Inflation. Inflation means the average price level of goods and services in an economy increases over a period of time. When inflation occurs, the prices constantly rise, meaning that we can buy less things than before. It indicates a decrease in the purchasing power of our currency.
It’s generally believed among economists that inflation occurs when money supply growth outpaces economic growth. In short, a nation has issued too much money.
For example, if there are 3 people in the nation, Amanda, Bernice and Charlie. Amanda grows wheat, Bernice makes clothes and Charlie is a pig farmer. One day, Amanda spends $2 to buy clothes from Bernice, Bernice uses the $2 she earned to buy pork form Charlie, Charlie uses this $2 to buy bread from Amada.
The quantity of money of 6, but the velocity of money is 3. So, this nation only needs to print $2. If it issues more money, the price will be higher and there will be inflation.
It is a country’s monetary authority’s duty to keep inflation within permissible limits. Inflation is quite normal in an economy. After all, no one can calculate the amount of money that market actually needs so accurately. There are always some errors.
Inflation is neutral word.
A modest inflation can do good to an economy. With more money, enterprises can expand their production scale and increase employment.
High or negative inflation can damage an economy. It leads to chaos in the market, preventing business from making investments and causing unemployment. Also, residents can buy less than before and live a difficult life.